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Federal Reserve Bank of Minneapolis
Staff Report
External and Public Debt Crises
Cristina Arellano
Andrew Atkeson
Mark L. J. Wright
Abstract

The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in the flexibility of state fiscal institutions.


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Cristina Arellano & Andrew Atkeson & Mark L. J. Wright, External and Public Debt Crises, Federal Reserve Bank of Minneapolis, Staff Report 515, 07 Jul 2015.
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Keywords: Debt crises; Sudden stops; Interference with private contracts; Tax flexibility
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